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Economic Update

June 2, 2014

Economic themes: Manufacturing, GDP, Europe, Personal Income/Outlays, Consumer Sentiment.

  • Manufacturing: Manufacturing gave mixed signals this morning with the ISM issuing two corrections, as the ISM Manufacturing Index posted at 55.4 reading, slightly below expectations of 55.5, with employment and new orders slowing.  Likewise, Markit’s PMI Manufacturing Index posted a 56.4 reading, above expectations of 56.2, led by new orders, backlog orders and output.
  • GDP: Gross Domestic Product in Q1 declined by 1%, worse than forecasts of a 0.5% decline, with the price index in line with expectations, increasing 1.3%.  Adverse winter weather was the primary culprit, with weakness also seen in inventory investment and exports, and strength seen in residential investment, nonresidential fixed investment and personal consumption expenditures.
  • Europe: Spreads on Treasuries to European sovereign debt are at the highest since 2012, amid speculation that the European Central Bank will cut interest rates in an effort to prevent deflation, which would be in contrast to the Fed’s tightening monetary policy.  ECB President Mario Draghi has threatened measures including negative deposit rates and conditional liquidity to support such measures.  Their near term decision is expected to be rendered on June 5th.
  • Personal Income and Outlays: After strong gains in March, personal income increased by 0.3%, personal spending fell by 0.1%, and the price index increased by 0.2% in April.
  • Consumer Sentiment: The Reuters/University of Michigan Consumer Sentiment Index posted an 81.9 reading for May, below forecasts of an 82.5 reading, as the current conditions component fell below expectations, though was boosted by the jobs and income expectations components.
  • Economic highlights for the week ahead:

o    Wednesday 6/04/2014: International Trade.

o    Thursday 6/05/2014: Jobless Claims.

o    Friday, 6/06/2014: Employment Situation.

Municipal market themes: SCLAA, San Pablo.

  • SCLAA: The Southern California Logistics Airport Authority is using tax increment revenue to cure existing defaults, though defaulted again on the subordinate bond payments on June 1st, as the trustee does not allow for partial payments.
  • San Pablo: San Pablo is scheduled to be the next tax allocation bond refunding, as they are putting together a $52.4 million deal, in order to refund a variable rate bond deal that has not gone in the favor of the city, and to refinance higher interest fixed rate debt.

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